Make no mistake, this is a takeover in the truest sense of the word.
China has spent decades building up its war chest by collecting interest on U.S. debt and selling its low-cost goods overseas. Now, with $3.3 trillion in foreign currency reserves, it’s using the same paper that we sent over there to buy our hard goods.
After all, it’s better to own real assets than a mountain of fiat currency.
And that’s precisely why this isn’t a one-time deal. It’s the beginning of a major trend that will inevitably shift the global balance of power from the West to the East.
We’re not just talking China, either – although it is the biggest player.
Just last week, I wrote about India’s foray into Kazakhstan. And another deal for Canadian assets from Malaysia’s Petronas is expected to close this week. Petronas – probably better known in the West as the namesake of the twin towers in Kuala Lumpur – is buying Canada’s Progress Energy Resources (PRQ) for $5.2 billion.
This is an economic necessity for countries in the West, which are asset-rich but cash-poor. Don’t get me wrong, Canada isn’t exactly cash-poor, but its neighbor to the south certainly is. And with political gridlock stymying budget talks, Chinese investment in the United States is inevitable.
In fact, it’s already begun…
While regulators have previously prevented Chinese companies from acquiring large U.S. energy companies directly, the CNOOC deal marks an important foothold. It’s a backdoor way for China to access U.S. assets. Remember, Nexen is one of the largest leaseholders in the Gulf of Mexico, with more than 100 exploration prospects and reserves of approximately 116 million barrels of oil equivalent.
But that’s just a stepping stone. China’s ultimate goal is to buy up U.S. shale oil and gas properties to feed the monstrous demand back home. There’s no telling where China will strike next, but we’re talking big game hunting, here. That means energy giants like Chesapeake (CHK) and Devon (DVN) are both possibilities. Canada’s Encana (ECA) remains in play, as well.
What’s especially troubling about this is that assets like Nexen’s are now controlled by a foreign sovereign entity – one that ranks at the bottom of the global pile when it comes to transparency and corruption. And in the years to come, we’ll see even more questionable buyers come to the aid of cash-strapped countries and companies.
In addition, if China can make the Nexen deal work and show transparency for a while, it will be even harder for Congress to block future attempts from Chinese companies to take over U.S. assets.
Such is the price countries pay when they can’t get their fiscal houses in order. Sooner or later, they have to turn to other characters – savory or not – to bail them out.
Asia (and China in particular), is where tomorrow’s bailouts will come from. So the deals that will close this week are not the end of the story. They’re just the first salvos from East to West in the global resource chase.
And “the chase” continues,